Money Laundering In A Changed World - Part Ii
By Sam Vaknin, Wed Dec 7th

Money Laundering in the Wake of the September 11 Attacks

Regulation

The least important trend is the tightening of financialregulations and the establishment or enhancement of compulsory(as opposed to industry or voluntary) regulatory and enforcementagencies.

New legislation in the US which amounts to extending the powersof the CIA domestically and of the DOJ extra-territorially, wasrather xenophobically described by a DOJ official, MichaelChertoff, as intended to "make sure the American banking systemdoes not become a haven for foreign corrupt leaders or otherkinds of foreign organized criminals." Privacy and bank secrecylaws have been watered down. Collaboration with off shore"shell" banks has been banned. Business with clients ofcorrespondent banks was curtailed. Banks were effectivelytransformed into law enforcement agencies, responsible to verifyboth the identities of their (foreign) clients and the sourceand origin of their funds. Cash transactions were partlycriminalized. And the securities and currency trading industry,insurance companies, and money transfer services are subjectedto growing scrutiny as a conduit for "dirty cash".

Still, such legislation is highly ineffective. The AmericanBankers' Association puts the cost of compliance with the laxeranti-money-laundering laws in force in 1998 at 10 billion USdollars - or more than 10 million US dollars per obtainedconviction. Even when the system does work, critical alertsdrown in the torrent of reports mandated by the regulations. Onebank actually reported a suspicious transaction in the accountof one of the September 11 hijackers - only to be ignored.

The Treasury Department established Operation Green Quest, aninvestigative team charged with monitoring charities, NGO's,credit card fraud, cash smuggling, counterfeiting, and theHawala networks. This is not without precedent. Previous teamstackled drug money, the biggest money laundering venue ever,BCCI (Bank of Credit and Commerce International), and ... AlCapone. The more veteran, New-York based, El-Dorado anti moneylaundering Task Force (established in 1992) will lend a hand andshare information.

More than 150 countries promised to co-operate with the US inits fight against the financing of terrorism - 81 of which(including the Bahamas, Argentina, Kuwait, Indonesia, Pakistan,Switzerland, and the EU) actually froze assets of suspiciousindividuals, suspected charities, and dubious firms, or passednew anti money laundering laws and stricter regulations (thePhilippines, the UK, Germany). A tabled EU directive would forcelawyers to disclose incriminating information about theirclients' money laundering activities. Pakistan initiated a"loyalty scheme", awarding expatriates who prefer official bankchannels to the much maligned (but cheaper and more efficient)Hawala, with extra baggage allowance and special treatment inairports.

The magnitude of this international collaboration isunprecedented. But this burst of solidarity may yet fade. China,for instance, refuses to chime in. As a result, the statementissued by APEC last week on measures to stem the finances ofterrorism was lukewarm at best. And, protestations of closecollaboration to the contrary, Saudi Arabia has done nothing tocombat money laundering "Islamic charities" (of which it isproud) on its territory.

Still, a universal code is emerging, based on the work of theOECD's FATF (Financial Action Task Force) since 1989 (its famous"40 recommendations") and on the relevant UN conventions. Allcountries are expected by the West, on pain of possiblesanctions, to adopt a uniform legal platform (includingreporting on suspicious transactions and freezing assets) and toapply it to all types of financial intermediaries, not only tobanks. This is likely to result in ...

The decline of off shore financial centres and tax havens

By far the most important outcome of this new-fangled juridicalhomogeneity is the acceleration of the decline of off shorefinancial and banking centres and tax havens. The distinctionbetween off-shore and on-shore will vanish. Of the FATF's "nameand shame" blacklist of 19 "black holes" (poorly regulatedterritories, including Israel, Indonesia, and Russia) - 11 havesubstantially revamped their banking laws and financialregulators. Coupled with the tightening of US, UK, and EU lawsand the wider interpretation of money laundering to includepolitical corruption, bribery, and embezzlement - this wouldmake life a lot more difficult for venal

politicians and majortax evaders. The likes of Sani Abacha (late President ofNigeria), Ferdinand Marcos (late President of the Philippines),Vladimiro Montesinos (former, now standing trial, chief of theintelligence services of Peru), or Raul Salinas (the brother ofMexico's President) - would have found it impossible to loottheir countries to the same disgraceful extent in today'sfinancial environment. And Osama bin Laden would not have beenable to wire funds to US accounts from the Sudanese Al ShamalBank, the "correspondent" of 33 American banks.

Quo Vadis, Money Laundering?

Crime is resilient and fast adapting to new realities. Organizedcrime is in the process of establishing an alternative bankingsystem, only tangentially connected to the West's, in thefringes, and by proxy. This is done by purchasing defunct banksor banking licences in territories with lax regulation, casheconomies, corrupt politicians, no tax collection, butreasonable infrastructure. The countries of Eastern Europe -Yugoslavia (Montenegro and Serbia), Macedonia, Ukraine, Moldova,Belarus, Albania, to mention a few - are natural targets. Insome cases, organized crime is so all-pervasive and localpoliticians so corrupt that the distinction between criminal andpolitician is spurious.

Gradually, money laundering rings move their operations to thesenew, accommodating territories. The laundered funds are used topurchase assets in intentionally botched privatizations, realestate, existing businesses, and to finance trading operations.The wasteland that is Eastern Europe craves private capital andno questions are asked by investor and recipient alike.

The next frontier is cyberspace. Internet banking, Internetgambling, day trading, foreign exchange cyber transactions,e-cash, e-commerce, fictitious invoicing of the launderer'sgenuine credit cards - hold the promise of the future.Impossible to track and monitor, ex-territorial, totallydigital, amenable to identity theft and fake identities - thisis the ideal vehicle for money launderers. This nascent platformis way too small to accommodate the enormous amounts of cashlaundered daily - but in ten years time, it may. The problems islikely to be exacerbated by the introduction of smart cards,electronic purses, and payment-enabled mobile phones.

In its "Report on Money Laundering Typologies" (February 2001)the FATF was able to document concrete and suspected abuses ofonline banking, Internet casinos, and web-based financialservices. It is difficult to identify a customer and to get toknow it in cyberspace, was the alarming conclusion. It isequally complicated to establish jurisdiction.

Many capable professionals - stockbrokers, lawyers, accountants,traders, insurance brokers, real estate agents, sellers of highvalue items such as gold, diamonds, and art - are employed orco-opted by money laundering operations. Money launderers arelikely to make increased use of global, around the clock,trading in foreign currencies and derivatives. These provideinstantaneous transfer of funds and no audit trail. Theunderlying securities involved are susceptible to marketmanipulation and fraud. Complex insurance policies (with the"wrong" beneficiaries), and the securitization of receivables,leasing contracts, mortgages, and low grade bonds are alreadyused in money laundering schemes. In general, money launderinggoes well with risk arbitraging financial instruments.

Trust-based, globe-spanning, money transfer systems based onauthentication codes and generations of commercial relationshipscemented in honour and blood - are another wave of the future.The Hawala and Chinese networks in Asia, the Black Market PesoExchange (BMPE) in Latin America, other evolving courier systemsin Eastern Europe (mainly in Russia, Ukraine, and Albania) andin Western Europe (mainly in France and Spain). In conjunctionwith encrypted e-mail and web anonymizers, these networks arevirtually impenetrable. As emigration increases, diasporasestablished, and transport and telecommunications becomeubiquitous, "ethnic banking" along the tradition of the Lombardsand the Jews in medieval Europe may become the the preferredvenue of money laundering. September 11 may have retarded worldcivilization in more than one way.

About the author:Sam Vaknin is the author of Malignant Self Love - NarcissismRevisited and After the Rain - How the West Lost the East. He isa columnist for Central Europe Review, United PressInternational (UPI) and eBookWeb and the editor of mental healthand Central East Europe categories in The Open Directory andSuite101.

Web site:

http://samvak.tripod.com/